In a move that has sent a ripple of concern through the corridors of power in Whitehall, President Joe Biden described his predecessor Donald Trump as a 'loser' during a high-profile fundraiser. The remark, delivered with characteristic bluntness, has been met with unease among British allies who fear it signals deeper instability in the US political landscape.
For those of us who watch the markets, this is not merely a matter of political theatre. The US dollar has already shown signs of jitteriness, with the greenback slipping against a basket of currencies. The VIX, Wall Street's fear gauge, ticked up marginally in after-hours trading. When the leader of the free world engages in schoolyard name-calling, it does not inspire confidence in the stability of the world's largest economy.
The timing could not be worse. With inflation still stubbornly above the Fed's 2% target and the 10-year Treasury yield flirting with 4.5%, the last thing investors need is a reminder of the deep divisions that threaten to paralyse Washington ahead of the next election cycle. British pension funds, which hold significant exposure to US Treasuries, will be watching this closely. Any hint of sovereign risk in the US is a direct threat to gilt yields here at home.
Labour politicians have been quick to distance themselves from the fray, but the damage may already be done. The special relationship is built on a foundation of mutual predictability. When the US president starts sounding like a tabloid headline, our own diplomatic currency is devalued.
The bottom line? This is noise that the markets had hoped to avoid. Fiscal responsibility and central bank credibility are hard enough to maintain without adding political volatility into the mix. For now, the best course of action is to keep a close eye on the polls and hedge accordingly. The US election is still 18 months away, but the campaign trail is already proving to be a minefield for global markets.
